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Friday, January 20, 2012

In what is proving to be a political disaster of mammoth proportions, Mitt Romney’s tax situation is dribbling out, and the slow and agonizing manner in which the details are being made public is resulting in a slow and agonizing tax torture for Mr. Romney.The latest thing to surface is that Mr. Romney is using CaymanIsland corporations to shelter is IRA from having to pay a tax.

A quick lesson tax law is necessary here.A regular IRA does not pay tax on its income, the tax is paid on withdrawals from the IRA.As a Tax Exempt (temporary) entity though, the IRA would have an advantage if it operated a business, because its competition would have to pay taxes and the IRA would not.So if the IRA is invested in an active business it would have to pay a tax, called UBIT, Unrelated Business Income Tax.This makes the playing field level between tax exempt owners and taxable owners.

tax experts said that had Mr. Romney’s IRA invested in Bain funds in the U.S., he would likely have been forced to pay an obscure levy called the “unrelated business income tax,” also known as UBIT.

This tax, assessed for individuals at a maximum 35% rate, is meant to discourage tax-exempt entities such as an IRA or college endowment fund from unfairly competing with for-profit, taxpaying entities by operating a business without paying taxes on it. Investing in a partnership such as a Bain Capital fund that uses debt to buy companies would trigger the tax, experts said.

For this reason, the experts said, it is very common for private-equity funds such as Bain to set up vehicles in offshore locales such as the Cayman Islands. Such a structure allows American tax-exempt entities, including IRAs, to avoid paying UBIT.

Now the legality of this does not appear to be at issue.The propriety of it for a Presidential candidate, well that is something the voters will have to decide.As for the Romney defense

In response to a question about whether investing in the Cayman Islands entities allowed Mr. Romney to avoid paying the UBIT levy, a campaign aide said late Wednesday: “Governor Romney’s IRA is tax deferred, just like the IRA’s of every other American. Its investments are in compliance with rules created to keep it tax deferred, just like it was intended to be.”

Thursday morning, the same aide added: “There is absolutely nothing misleading here. The ABC story was not about the governor’s IRA.” The aide also said: “The IRS created these special rules to ensure IRA’s could remain tax deferred like they were intended to be. There is no ‘avoidance.’”

which is categorically false.The IRS did not create these special rules to let IRA’s avoid UBIT, they are just part of a tax code that can be exploited by investors with large wealth and smart tax lawyers.And if it is true that by holding these investments in the U. S. based entity the IRA would have had to pay UBIT, then the statement that there is “no avoidance” is a blatant lie.

Just don’t expect the Fact Checkers to treat it that way, at least not the ones who regard Mr. Romney’s lies on a different standard than the other candidates. And if anyone is searching for the right word to describe Mr. Romney's strategy of avoiding taxes, the term "sleazy" jumps to the head of the line.